The challenge
for many Risk executives often revolves around the budgets needed to execute
risk management initiatives, and to demonstrate the return on operational or capex
spend relating to risk management projects. Once the Finance executives fully
understand the motivations and benefits of the risk management initiatives, the
organisation’s response to transactional and strategic risk management will
improve.

Finance
executives cannot be expected to be risk and insurance specialists, and are
thus supported by the Risk executives. The key areas where a common
understanding is needed include:·

More than two
thirds of all risks are generally not insurable; although some parts of these
risks can be insured. Based on extensive research, we know that insured
(hazard) risks do not materially impact on share prices because investors
expect that the residual risk is low for hazard risks. Thus, how should the Finance
exec ensure (vs insure) that the financial sustainability of each of their
operations is maintained at optimal levels?

The risk to
the Finance exec in these areas starts the "unknown unknown” – thus the first
objective is to ensure that insurance covers are adequate and appropriate to
the nature of their operations. The really unpleasant surprises relate to
losses where insurance cover is assumed to be available, but is not. Black Swan
events are not really surprising occurrences – it the scale of their impacts
that makes organisations wish that they were better prepared.

Examples of
"known unknowns” are the specifically uninsured risks. The challenge here is to
evaluate these exposures to develop risk mitigations which achieve real
reductions. Insurance based risk transfer is often assumed to be adequate by
Finance executives, but there are many complexities in the cover wordings which
may not address operational risks.

We should fully
examine the Total Cost of Risk in context of the above unknowns – total cost of
risk is not the same as cost of insurance / losses, and we need to understand
loss scenario’s for operational and strategic risks as well. TCOR should be
benchmarked and trended against operational KPI’s, so that Finance executives
understand the reasons for changes in exposures, as well as the cash flow
effects of risks.

Loss
scenarios should be understood in context of the Risk Bearing Capacity /
Appetite of the operations – if an uninsured risk occurred, can the loss be
sustained by the operation? The wider contexts of strategic risks should be
jointly evaluated by the Finance and Risk teams, because in today’s
interconnected business environment, the impacts of risks are:

Immediate
and medium term

Direct
and indirect as regards impairments or losses

Financial
and non financial, but similarly strategic

The concept
of risk based financial governance can be associated with financial resilience
– from the assessment to reporting and delivery of financial returns. Financial
resilience needs the comprehensive inputs of risk specialists, from both
quantitative and qualitative perspectives.